Deficit Hysteria

by Ted P. Schmidt

Deficit hysteria is in full spin mode. The business pages of daily newspapers (including our own) are filled with propaganda about federal government deficits, telling us that “we need to fix Social Security now,” or “the federal government can’t keep bailing out states, the dollars just aren’t there anymore.” Hogwash! If Obama and Congress try to fix the deficit now, history will repeat. Just as FDR’s attempt to balance the budget in 1937 caused the teetering economic recovery to totter into a double-dip depression the following year, Obama will experience the same if he tries to cut spending now.

There are serious issues to address regarding projected future government deficits, but now is not the time to “fix” them. The US economy has shown signs of recovery, but in now way are we “out of them woods yet.” If we reduce government spending now, then we lose the main driving force in the economy, and, as it goes, so will more jobs. It is absolutely idiotic for the federal government to pursue the same contractionary policies that state and local governments are forced to do, and the irony is that attempts to reduce the deficit now will actually cause the deficit to grow. Say what?

With the exception of the export sector, nearly all the growth we’ve experienced in the past year has come from increased government spending, tax cuts, or tax incentive programs. These are now over. As deficit hysteria causes Congress to start cutting spending and raising taxes, like the states and locals have been doing, the total government (fed, state, and local) fiscal situation will move from expansionary to contractionary (previously, federal stimulus spending was helping to counteract state and local cuts), causing unemployment to rise even higher. The result will be even lower tax revenues and higher government spending on unemployment benefits—deficits will be higher!

Maybe, as Representative Chris Lee said, the State of New York shouldn’t rely on handouts from the feds, and maybe it needs to be forced to make significant fiscal changes, but making these changes now is not what the patient needs. (Unless the real issue of the deficit hawks is to break unions and force change by creating even more misery?) However, it’s either ignorance or deceit for him to say “the dollars just aren’t there anymore” [to bail out the states]. Bull crap! The US Treasury owns the mint! It has an unlimited amount of dollars.

Printing money you say? Bu-bu-bu-but, isn’t that inflationary? Under normal conditions (meaning close to full employment) perhaps, but these are not normal times. Inflation occurs when resources are scarce; that is, unemployment is low and factories are running near capacity. We currently have excesses galore. Given this situation, the federal government must be the engine of demand until the recovery seriously takes hold. And if the government has to finance $1 trillion-plus deficits by “printing money” (or in actuality selling bonds to the Federal Reserve), then it should. And it should pursue this policy until unemployment approaches seven percent. Then, and only then, should we start talking about “fixing” that deficit thingy. By the way, guess what happens when unemployment goes down? With more people paying taxes and less spending on benefits for those formerly unemployed, deficits fall.

People are trying to scare you about deficits, either because they are ignorant or they have an agenda, and the same “Chicken Little” economists who believe we need to cut the deficit now are the same ones who argued that the financial sector could regulate itself.

The US government was in worse fiscal shape during World War II than it is in today, but it was government spending on the war that brought us out of the Great Depression. (Unemployment was actually less than two percent during the war.) After the war, government spending declined as the private sector transitioned back to a consumer-based economy, and the fiscal situation was eventually resolved.

The surest way to fix the current fiscal situation is through economic growth, and right now federal government spending is the “teeter” to the private sectors “totter.” The federal government needs to spend like we are at war (and in a sense we are, with the so-called “Great Recession”), then, as businesses gain confidence in the recovery and private spending goes up, federal spending can and will go down. The federal government is the big kid sitting on the other end, and if he jumps off now, well, you get the picture…

Dr. Ted P. Schmidt is an associate professor in the Department of Economics & Finance at Buffalo State College.